The FX168 Financial News Agency (Asia Pacific) reports that the Federal Reserve will publishThe Federal Open Market Committee (FOMC)the minutes from the November meeting of the FOMC this week, which contains excerpts indicating that the Federal Reserve is considering lowering the reward rate for the assets of the reverse repurchase tool by 5 basis points. Although this is unrelated to interest rate cut expectations, market analysis suggests that it reflects growing concerns about the liquidity levels of reserves in the bank of america.

The meeting minutes hide the following excerpt:

(Source: FOMC)

Essentially, the Federal Reserve is considering lowering the reward rate for the assets of the reverse repurchase tool by 5 basis points, which will lower the bottom of the target range for the federal funds rate.

Its trend graph is as follows:

(Source: FED, IE)

The market can only speculate why the FOMC wants to lower this interest rate, but there is a compelling theory: the Federal Reserve is increasingly concerned about the liquidity levels of reserves in the bank of america.

Given the increased usage of the standing repo facility at the end of the last quarter, coupled with FOMC members acknowledging that it is urgent to assess how long the algo tightening policy can last without potential pressure in the money market pipeline system.

The FOMC may attempt to provide ample liquidity by encouraging outflows from the standing repo facility and increasing bank reserves, thereby gaining an advantage.

The comparison of the 1 million dollar treasury bill with the RRP auction rate shows that money market funds typically alternate holding these two types of bonds, depending on which bond has a higher yield at the time. By lowering the auction rate, treasury bills become more attractive.

(Source: Trading View)

From the current RRP balance, it can be seen that there is still 186 billion USD in cash "trapped in" the RRP. By lowering the reward rate, the FOMC seems to be trying to inject these funds into the broader financial system to ensure adequate liquidity.

This occurs in the context of ongoing algo tightening (QT) getting closer to potentially putting pressure on bank reserve levels.

(Source: Trading View)

The market will have to wait until the next FOMC meeting in December to confirm whether this is indeed the case.

But the fact that the FOMC acknowledges this potential dynamic indicates their growing concern over the liquidity levels of bank reserves. #banking crisis#